Quick Facts

The Maldives’ economic freedom score is 53.4, making its economy the 134th freest in the 2015 Index. Its score has increased by 2.4 points, reflecting improvements in six of the 10 economic freedoms, including the control of government spending, investment freedom, property rights, and monetary freedom. The country has recorded its highest economic freedom score ever in this year’s Index. Ranked 28th out of 42 countries in the Asia–Pacific region, its overall score remains below the world and regional averages.

The Maldives is heavily dependent on fishing and tourism and has yet to achieve the benefits of diversification that follow from higher levels of economic freedom. A 5.0-point advance in its economic freedom score over the past five years has enabled the country to move out of the “repressed” category, but this advance has been led in large measure by a nearly 50-point improvement in government spending, meaning that improvements have been concentrated and not broad-based.

Weaknesses in the rule of law and protectionist measures that keep the domestic economy relatively closed continue to hold back economic development in the Maldives. Tariffs are over 20 percent. Political unrest and a strict investment regime deter potential foreign investors. The island economy’s political situation undermines the judiciary and has led to increased perceptions of corruption. A more broad-based commitment to institutional and structural reforms is necessary to allow the progress made in advancing economic freedom in recent years to bear fruit.

Background

The military forced President Mohammed Nasheed to step down in February 2012 after several weeks of anti-government street protests instigated by former dictator Maumoon Abdul Gayoom. In November 2013, Gayoom’s half-brother Abdulla Yameen was elected, putting an end to nearly two years of political turmoil. Tourism is the centerpiece of the economy, contributing 28 percent of GDP and over 90 percent of government tax revenue.

The government has been functioning more normally, allowing the democratic election in late 2013 of a president from the political opposition. In recent years, a new, independent auditor general has provided greater transparency and shed light on pervasive corruption. Nevertheless, the rule of law remains uneven across the country, and the inefficient judicial system is subject to political influence.

The Maldives has no individual or corporate income taxes. Commercial banks are subject to a tax rate of 25 percent. Other taxes include taxes on foreign-source income and tourism goods and services. The overall tax burden equals 21.2 percent of domestic income. Government expenditures equal 40.6 percent of domestic output, and public debt equals about 81 percent of GDP.

Incorporating a business takes five procedures and nine days on average, but completing licensing requirements takes over 100 days. The labor market is underdeveloped. Much of the labor force is employed in the large public sector. Although high public spending has moderated, increases in state-funded pensions and health benefits added to fiscal pressures in 2014.

The Maldives’ average tariff rate is 20.6 percent. The government relies on tariffs for revenue. Quotas restrict some agricultural imports. The government reviews proposed new foreign investment. The financial sector remains rudimentary, and much of the population operates outside of the formal banking sector. High credit costs and scarce access to financing continue to constrain the small private sector.